The Independent State of Papua New Guinea v Barclay Brothers (PNG) Ltd (2001) N2090

• Jurisdiction: Papua New Guinea
• Judge: Kapi DCJ
• Judgment Date: 06 June 2001
• Citation: (2001) N2090
• Court: National Court
• Year: 2001
• Judgement Number: N2090

Full Title: The Independent State of Papua New Guinea v Barclay Brothers (PNG) Ltd (2001) N2090

National Court: Kapi DCJ

Judgment Delivered: 6 June 2001

N2090

PAPUA NEW GUINEA

[NATIONAL COURT OF JUSTICE]

OS 298 of 2000

BETWEEN:

THE INDEPENDENT STATE OF PAPUA NEW GUINEA

Plaintiff

AND:

BARCLAY BROTHERS (PNG) LTD

Defendant

Waigani: Kapi DCJ

26, 27, 28 March, 6 June 2001

Contracts — Public Finance (Mangement) Act — Tender Process — Requirement for tender prescribed — Intention of the Parliament to prohibit contracts without tender s 40 (1) — Meaning of "public body" discussed.

I. Molloy with K. Kua for the plaintiff

J. Griffin QC with G. Varitimos for the defendant

6 June 2001

Kapi DCJ: The State in an originating summons seeks a declaration that it is not a party to a written contract entered into between Barclay Brothers PNG Limited (BB) and Southern Highlands Gulf Highway Limited (SHGHL) to construct a national road link between Southern Highlands and the Gulf Provinces and that SHGHL did not act as agent of the State in entering into the contract. In the alternative, it seeks a declaration that even if SHGHL was acting as an agent of the State in entering into the contract, it is nevertheless null and void for not complying with certain provisions of the Public Finance (Management) Act 1995 (as amended) (PFM Act).

Counsel for the State submits that SHGHL is a separate entity and there is no express or implied agreement that SHGHL entered into the contract as agent of the State, and therefore, it cannot be bound by its terms. He further submits that even if SHGHL acted as agent of the State, the contract is null and void because it was entered into in breach of s 40 and s 47 of the PFM Act. On the other hand, counsel for BB submits that SHGHL was acting as the agent of the State and therefore it is bound by its terms. He further submits that breach of s 40 and 47 of the PFM Act in the present case does not invalidate the contract.

The background to the originating summons is this. For some years, the National Government in consultation with the Gulf and the Southern Highlands Provincial Governments has been interested in building a national road linking the two Provinces via the existing road network from Kagua to Erave and then via Samberi to the Kikori District in the Gulf Province. The National Executive Council (NEC) approved this project in principle at its meeting (Meeting No. 18/98) on 27th March 1998. The NEC regarded this project as a "priority project of the State" and at its meeting on 7th May 1998 (Meeting No. 242/98) the NEC approved the various phases of the project and its funding and subsequently appointed a Steering Committee to oversee the project. Some contractual work was carried out on the road project through the Department of Works under the authority and direction of the Steering Committee.

On the 23rd September 1998, the State incorporated the SHGHL under the Companies Act. The company was established for the single purpose of constructing the road and for raising finance for the road project. There was only one share on issue and was initially held by the Minister for Treasury and Corporate Affairs on behalf of the State and was subsequently assigned to the Minister for Works.

The NEC at its Meeting No. 61/98 on 13th November 1998 approved (Decision No. 282/98) SHGHL as the "implementation agency" for the road project. The then existing contracts with the State in respect of the road project were subsequently assigned to SHGHL. On 8th December 1998 the Heads of Agreement was executed between the State, BB and SHGHL to negotiate and execute a performance-based contract to construct the road. SHGHL subsequently published a full page public notice in the newspapers in March 1999 that it was the "principal" in respect of the road project.

Subsequently, SHGHL entered into several contracts in respect of the road project. The relevant contract for the purposes of the present proceedings is the contract entered with BB on 9th April 1999. This contract was retrospectively approved by the NEC on 28th April 1999 in Decision No. 96/99. At the same meeting, the NEC approved financing of the road project that included approval for the PNGBC to advance money to SHGHL and the State proposed to provide a guarantee in favour of PNGBC. The bank granted a loan on this undertaking but the State failed to provide a guarantee as promised. Subsequently, when the Executive Government changed, it withdrew its support for the road project and SHGHL was unable to meet its obligations. The bank in an effort to recover its advances to SHGHL took legal proceedings and the National Court appointed an interim liquidator to SHGHL on 24th September 1999.

Subsequently, BB commenced arbitration proceedings on or about 20th April 2000 in the International Chamber of Commerce International Court of Arbitration in Paris against the State on the basis that when SHGHL entered into the contact it did so as agent of the State. As a consequence of the proceedings in Paris, the State brought this summons to determine whether it is a party to the contract and liable under the contract. BB has undertaken not to proceed further with the arbitration until the proceeding now before me is determined.

I am satisfied that the State incorporated SHGHL for the single purpose of financing and constructing the road. The company was incapable of doing anything without the injection of vision, personnel, finance and infrastructure from the State and its instrumentalities. Counsel for the State does not contest this.

However, he submits that significant events have taken place that affected the status and the relationship between the State and SHGHL. In particular, he submits that the State intended to establish a separate legal entity that would take over all aspects of the road project. He submits that this intention was confirmed in Heads of Agreement entered into between the State, BB and SHGHL on 8 September 1998. He submits that at no stage did the officers acting on behalf of SHGHL stated either orally or in writing that it was entering into the contract as agent of the State other than that they were doing so as authorized officers of a separate entity. He relies on several factors including the public notice published in the media in which SHGHL is referred to as the principal.

The parties do not contest the general principles of agency and are summarized as follows

"The general rule is that a principal is bound by, and entitled to the benefit of, the contract of his agent made on his behalf within the scope of such agent's actual authority, whether the principal was disclosed, i.e. his existence, even if not his identity, was known to the third Party at the time of contracting, or undisclosed (i.e. his existence was not so known)" (Chitty on Contract 25 edn vol. 2 para. 2246).

The onus is on the State (plaintiff) to prove that SHGHL was not acting as agent of the State when it entered into the contract. I take into account the submission by counsel for the State that there is no record in the contract expressly stating that SHGHL was entering into the contract as agent of the State. This of itself is not determinative of this issue.

I am satisfied that the NEC expressly gave authority to the SHGHL to raise funds and to construct the road. There can be no doubt that the NEC regarded the SHGHL as it's "implementation agent". The question is, whether, the SHGHL was acting as agent of the State when it entered into the contract from all of the circumstances?

The State relies on evidence of two witnesses; Mr Michael Gene the Attorney-General at the relevant time and Mr Mumu the Deputy Secretary of Works. Mr Gene's evidence is not helpful on the question whether SHGHL was acting as agent for the State when the company signed the contract with BB. He did not disagree with the suggestion in cross-examination that NEC regarded the road project as important and incorporated SHGHL as its implementing agent. His real complaint was that the NEC did not consult him on the legal aspects of the execution of the contract. He agreed in cross-examination that the National Government had previously authorized and incorporated a company to carry out Government projects.

Mr Mumu was at the time the Deputy Secretary and was involved with the project from the beginning. It is not necessary to set out the effect of his evidence in full. His evidence also confirms the intention of the NEC that SHGHL was incorporated for the sole purpose of constructing the road on behalf of the National Government. He was not able to give evidence on whether SHGHL entered into the contract with BB as agent of the State.

Two members of the SHGHL Board, Mr O'Neill and Mr Brian de...